Types of Alternative Investments

Perhaps the easiest way in which to define the term alternative investments is to think about what you consider to be an investment. Most people would name stocks, bonds, and cash as investments, perhaps even property. There the list might end.

An alternative investment is anything which falls outside of this list of traditional investment asset classes, and can be tangible or intangible assets. The list includes physical assets such as coins and stamps, as well as ‘paper’ investments such as financial futures and options, binary options, forex trading and commodities derivatives. We look at some of these below:

Forex

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Forex is about trading or hedging currency pairs. Some of the most commonly traded pairs include EUR/USD, GBP/USD and USD/JPY.

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Is Alternative Investing for You?

One of the secrets of making better than average gains from investing in the financial markets is to invest in what you know. Usually this means either conducting your own research and making buy and sell decisions accordingly, or perhaps relying on the analysis conducted by market professionals. You probably already use the services of market professionals to manage some of your investments: retirement funds and mutual funds are invested in this way.

Invest with passion

If you have a hobby or passion, the knowledge that you have acquired in its pursuit would have been built up over a long period of time. You really know your stuff. Perhaps people seek your advice with regards to your particular area of expertise. Have you ever considered investing your money as well as your time in your passion?

Numismatists might build coin collections because they are interested in a particular historical period, or style of coin. Those collections become investments. The same can be said for stamp collectors, comic book readers, and the like.

Perhaps you like the odd glass of wine. You may even have been instructed in wine tasting. What better way to progress this passion than to begin investing in fine wines?

Memorabilia, whether its sports, celebrity, politics, or any number of other things, can not only be entertaining but also prove profitable. Specialist auctions can see millions of dollars change hands, and have you ever been to a baseball card convention?

Cars, horses, real estate, books, toys, and antiques are all areas where people get excited and property change hands. For the enthusiast, hobbies often turn to investment opportunities without the realization that this is happening.‘

Real’ Alternative Investments

Of course, for those that are still not convinced that things like toys, cars, and memorabilia should be considered as investments, then there are a host of ‘real’ alternative investments available.

Physical investment assets would include gold, silver and other precious metals, as well as commodities such as oil, wheat, or orange juice. Forestry property and land, and renewable energy items such as solar panels and wind turbines might also be included in this list.

Non-physical alternative investments are usually complex investments into financial instruments. Buying stocks is, at the base level, fairly easy to understand. A company’s stock will go up if its profits increase and it pays higher dividends (ok, this is very simplistic and not always the case, but a good basis for understanding the difference to alternative investments). Other financial investments work in a far more complicated way. For example, certain hedge funds will use instruments to profit from a falling market, or combination of long and short derivatives, or when markets remain neutral and don’t move up or down.

Other managed funds place investors’ cash into new, privately held companies.

Alternative Investments: the positives and negatives

Alternative investments often move differently to traditional investments products. For example, when the stock market is falling, the price of fine artworks may be increasing.

It’s also possible to generate an income from many alternative investments that might be unavailable for stocks, bonds, or cash. Paintings can often be hired out to galleries; land and property can generate rental income.

There are also potentially high gains to be made from such investments. Coins and stamps can be bought privately and sold at specialist auctions; fine wines, art, and property can produce great profits.

On the downside, many alternative investments suffer because of their uniqueness. Illiquid markets can mean difficulty in pricing and sale, and the costs of doing so may be far higher than those incurred when buying and selling traditional investments (consider estate agency fees on property transactions, or auction house commissions, for example).

Finally, historic information on pricing may be limited, and this in turn could make research a long and difficult process.

If you are willing to assume a little more risk than under many traditional investments, then alternative investments can produce great returns. Of course, that risk is decreased if you conduct full and proper research, or perhaps use your existing knowledge as a base to build on. For those that want to benefit from the opportunities that alternative investments offer but are unable to commit the time to research, then the number of funds that cater to this need is increasing almost daily.

Placing a portion of your investment cash into alternative investments could be a fun way to take a more active part in your investments based upon a lifelong passion, or seeing profits from a managed fund dedicated to more complex financial instruments. The choice is yours: there are plenty of alternatives out there.